Market profile Trading strategies – Open Outside Ranges

If you have been trading derivatives especially the shorter format, then have you ever been in a position when the market has opened up as a gap up and you were in a short position?

Or the market has gapped down and you were long?

What do you do then?

In the first minute of the Open do you panic and rush and close the position?

Let’s say you are a bit more mature in the trading sphere, but the vast majority will still go and close the position within the first five minutes right?

An open which has exceeded the previous day’s high or the lows brings an element of uncertainty to the equation. The vast majority of traders just go and close that losing position at the first opportunity.

But at Vtrender we are big believers in Auction Market Theory and advocate the MarketProfile approach to trading.

And we will say if you ever find your self in a market which has opened outside the previous day’s range, then wait.

Don’t do much, but watch closely.

Here is the reason-

On the chart above we have plotted the last 196 sessions of the Nifty

Out of the 57 times, we have opened above the Previous day’s high (PDH) or roughly 29% of the time. So it is not very uncommon to see a market opening above the previous session high and happens once every 3 times roughly.

All the more reason for you to sit up and refine your approach

18 times the market has opened below previous session lows or 9% of the time

So roughly 40% of the time you have been put in a situation such as the one I outlined at the start of the post.

But here’s the interesting part.

Out of the 57 times, the market opened above previous highs, we came back to touch the VAH of the previous session 44% of the time.

Of the 44% of the time the Nifty came back to test the VAH, it went on to hit the POC 76% of the time.

The VAH is the value area high of the previous session and POC is the zone where the maximum volume was traded in the previous session.

If you know Auction Market Theory you would know that the VAH and the POC are well below the highs of the previous session.

In case of a gap down, the VAL was again hit 33% of the time and 83% of the time it went on to do the POC. So that is 5 for every 6 times.

The data is computed for the most recent 196 sessions and 196 are a lifetime if you are a shorter time frame derivatives trader.

So next time you see a gap and you are in a position which has gone against you, hold on for a bit more.

Odds are good that price retraces back to the POC of the previous session.

Next question is how do you track the POC of the previous session.

To answer that question, the POC is put up on the blog every day at the close.

I have never entered a trade in a market without knowing where the POC was in the previous session.

At Vtrender we have moved much beyond measuring the market through only 4 data points in the Open, High, Low and Close.

Trading a derivatives market only through those 4 variables,( all 4 of which are random anyway), is like watching your favorite football game through a CRT television when technology has evolved to a 4K UHD.

I’ll prefer viewing through my 4K UHD even though I know the game beamed is the same

Our firm belief is that you can not use the methods of the 1990’s to trade the markets of 2018.